Michael Scronic Ponzi Scheme (2017)

Controversy:

(White Plains Federal Court)

Michael Scronic is a hedge fund manager from New York who arrested by the FBI on October 5th, 2017 for being accused of being the creator of a $19.75 million Ponzi scheme after raising funds from 45 of his investors. He was released from a White Plains federal court on a $500,000 bond, while agreeing to have no contact with current ir former investors without going through his attorney first. Scronic also agreed to give up the deeds to his vacation condo in Vermont as well as land in Pawling, New York. Prosecutors said that Scronic spent the money on paying off credit cards, country club memberships and mortgage payments for his home. The Securities and Exchange Commission has also filed charges against him. Scronic, who is now 46 with academic degrees from Stanford and the University of Chicago,  lured his investors by lying about his track record and experience at Morgan Stanley and creating fake account statements with positive returns on their investments. From  1997-2005 Scronic worked as an executive director on a trading desk at Morgan Stanley for seven years before leaving to work on his own, the scheme is said to of started in 2012 and took place up until the summer of 2017. Scronic told one of his investors that, "what's cool about my fund is that i'm [sic] only in publicly traded options and cash so any redemptions are met within 2 business days so if you do need to withdraw for your business needs it will be quick and painless." This was not the case as he created many excuses for not returning investors money, he even went as far as lying about family members health. He falsified documents that stated the fund had 22 positive quarters with a high quarterly return of 13.4%, with only one negative quarter during the 5 year scam; Scronic also sent a document in June of 2017 stating the fund had a total of $21.7 million which was also a lie. The SEC found that only the first quarter had a positive return with Scronic losing money for the next 28 straight quarters, The fund started around $20 million and Scronic was able to lose $15.7 million during the 5 year scam leaving him with only $102,376 by the summer of 2017. The SEC also accused Scronic of telling investors that he is an investment adviser to a fake company which he sold shares of. 



Stakeholders:

The stakeholders in this scandal are the 45 people who invested with Scronic who in total lost $19.75 million.  Although he began to repay some of his investors, this stopped during the summer when Scronic started running out of money. These 45 investors were lied to and gave this man their hard earned money in hopes of having a positive return on their investment. However, the number of stakeholders is not limited to the just 45 investors for their families are affected as well as Scronic's family. Scronic was said to spend over $500,000 a year on himself and his family, with that money gone Scronic's family will be unable to keep up with the lifestyle they have become accustomed to for over 5 years and their main source of income looking at large penalties and even jail time. The identities of the 45 investors has not been released yet, so depending on their age and financial status determines how the money lost affects them. Some of the stakeholders could have been trying to grow a college fund for their children while some could have invested in Scronic to help secure their retirement. Never the less, with this large amount of money lost with so few investors, they are definitely hurting. With this type of scam it almost has a shotgun blast affect to anyone remotely close to Scronic, spreading guilt and shame to those who were not even involved. This scam affects Stanford University as well as the University of Chicago were Scronic attended college with them being listed in multiple articles about his case. This scheme shades those prestigious universities who pride themselves for being as selective as possible when enrolling students and for them to have accepted someone capable of doing this will definitely turn some heads. Other people who are caught in the cross fire are other investment companies who are smaller in size or just trying to get started  and gain investors who do not have that sound and stable reputation of larger existing companies. Whether these smaller companies currently have investors or are trying to gain some this scandal will hurt their business with people either trying to pull their money out of these companies or deciding not to invest in them out of fear of this happening to them. 

Individualism:

Individualism is stated as maximizing the profits of the business' owners without breaking the law, this scandal only checks one of those boxes. Scronic made as much money as he could from his investors, but the only reason he made money was because he was stealing from them. Scronic created a fake company and fake accounts to make himself look as trustworthy as possible which is also illegal. If Scronic actually used his investors money to create a positive return, while giving a percentage back to his investors only then would he be able to fall under the individualism ethical theory. Scronic was extremely selfish with this scam, spending over $500,000 a year on luxury items and memberships for himself and losing $19.75 million of investors money. Scronic knew exactly what he was doing and this scam feels premeditated as he was able to create falsified documents that stated the funds had a positive return, when really almost every quarter had a negative return. Scronic also sent his investors a statement in June of 2017, just months before he was arrested, saying he had a total of $21.7 million in a fund.

(Scronic and wife leaving the courthouse)

Kantianism:


Kantianism is defined in the case manual as, "Always act in ways that respect and honor individuals and their choices. Don't lie, cheat, or manipulate or harm others to get your way. Rather, use informed and rational consent from all parties." (Pg. 17) Scronic's ponzi scheme is the exact opposite of the Kantianism ethical theory. In this scandal Scronic does not check a single box for this theory. He lied to his investors, cheated them out of money, manipulated them into thinking he was trustworthy and harmed them by stealing about $19.75 million of their money to better his own life and bank account. I don't think that Scronic could have disrespected his investors more than he did, he fooled them into thinking he was a reliable investor, told them he would create positive returns on their investments and lied to them for over five years about account assets. While all this scheming was going on he was lining his own pockets to pay for his expensive lifestyle. Scronic could have avoided these legal charges by thinking about what he was doing to himself and his investors. Scronic should have used Maxims-for-action, as explained by Heather Salazar,  "The first step in determining whether you should perform an action is to identify the action. Developing a statement of the action will allow you and others to analyze whether the action is correct or not. Such statements are called maxims-for-actions and they involve asserting what you will do and for what purpose you will do it." (Salazar, Kantian Business Ethics, pg. 5) Professor Salazar does a great job explaining this and if Scronic used this method of thinking all of his troubles could have been avoided. 


Utilitarianism:

(Scronic court side at a Stanford basketball game)

The case manual defines utilitarianism as, "Business actions should aim to maximize the happiness in the long run for all conscious beings that are affected by the business action." (Pg. 17) This scandal is also the total opposite as the utilitarian ethical theory. There was only one person who was happy with the investments of over $19.75 million and that was Michael Scronic himself because he was putting all of it into his own pocket.

Even though some of his investors did receive some money from Scronic for repayment, it is not yet known how much was returned and to how many investors but based on Scronic's current financial status, of $102,376, is not nearly enough to undo the damage that has already been done. "Under a utilitarian framework, all beings who are capable of experiencing happiness should be considered when weighing the cost and benefits of actions." (Salazar, The Case Manual, pg. 20) The utilitarian ethical theory is most frequently used by those who have to make a tough decision, the decision Scronic made would not be an example of that. He could have easily chose to invest his clients money in profitable ways, while taking a percentage of the profits for himself so everyone was happy, but instead chose to lie and cheat. 


Virtue Theory:

The case manual describes the virtue theory as, "Act so as to embody a variety of virtuous or good character traits and so as to avoid vicious or bad character traits." (Pg. 17) Scronic would to have actually invested his investors money and shown some return on those investments to have fit into this theory. Just like all the other ethical theories explained in the prompt, Scronic does not follow this one. He showed horrible character with his actions going as far to lie to investors about family members health, blame email issues and vacations as to why he was unable to return investors money. Scronic is a very vicious man with horrible character.  "You can analyze actions within virtue theory framework by asking whether the actions under consideration embody or advance virtues or not." (Salazar, The Case Manual, pg. 23) Scronic could have used his time to actually do his job and hekko his clients, but instead he used his time to create falsified documents with return on investment number and total assets in funds to make it seem as if he was actually doing the right thing. 


References: 

Stempel, Jonathan. “UPDATE 2-New York-Area Hedge Fund Manager Charged with Ponzi Fraud.” CNBC, CNBC, 5 Oct. 2017, www.cnbc.com/2017/10/05/reuters-america-update-2-new-york-area-hedge-fund-manager-charged-with-ponzi-fraud.html.

“Investment Adviser Charged in Multi-Million Dollar Options Trading Scheme.” SEC Emblem, 5 Oct. 2017, www.sec.gov/news/press-release/2017-189.

English, Carleton. “Man Busted for Posing as Hedgie Investor in $19M Ponzi Scheme.” New York Post, New York Post, 5 Oct. 2017, nypost.com/2017/10/05/man-busted-for-posing-as-hedge-fund-investor-in-19m-ponzi-scheme/.

Salazar, H. (n.d.). Kantian Business Ethics. Retrieved October 10, 2017

Salazar, H. (n.d.). The Business Ethics Case Manual. Retrieved October 10, 2017

Spillane, Matt. “Pound Ridge Man Arrested, Accused of Running $19M Ponzi Scheme.” Lohud.com, The Journal News, 5 Oct. 2017, www.lohud.com/story/news/crime/2017/10/05/pound-ridge-man-arrested-accused-running-19-m-ponzi-scheme/735356001/.